Implementation of Basel Standards in the European Union

Basel II standards are implemented in the EU in the form of Directives 2006/48/ЕС and 2006/49/ЕC (Capital Requirements Directive – CRD). All member states were required to transpose these directives into national legislation by the end of 2006. The implementation of Basel II standards in the EU began on 1 January 2007, while the use of advanced approaches for calculation of capital requirements for credit and operational risk, with prior supervisory approval, was enabled starting from 1 January 2008.

The first wave of the financial crisis from autumn 2008, which in a short period of time transcended financial sector boundaries, growing into the greatest economic crisis of modern times, highlighted that the existing international regulatory framework for banks left too much room for uneven national implementation and for regulatory arbitrage.

Having identified the need for tighter coordination of national responses to the global crisis and for redesigning the global regulatory and supervisory architecture, the initial changes to Basel II standards marked the beginning of changes to the international regulatory framework through amendments to the existing and adoption of new directives by the European Commission. Regulators from the EU countries are required to keep track of the new directives concerning capital requirements for banks and adjust their national frameworks accordingly.

The first significant change of the CRD was made in 2009 when, ending with September, a new set of directives was adopted: Directives 2009/27/EC, 2009/83/EC and 2009/111/EC, commonly referred to as CRD 2. These directives, implemented at national level by the end of 2010, primarily regulate the inclusion of hybrid instruments in Tier 1 capital, large exposures and cooperation between home and host supervisors. After that, the Directive 2010/76/EC (the CRD 3) was adopted with the aim of further regulating the implementation of the rules relating to securitization, capital requirements for market risk and remuneration policies. Its national implementation in the EU member states started by the end of 2011.

In 2010 the European Commission initiated changes to regulations in line with the expected changes to Basel II standards and new liquidity standards proposed by the Basel Committee. The contemplated changes pertained to: liquidity standards, definition of capital, leverage ratio, counterparty risk, countercyclical measures, systemically important financial institutions and introduction of the so called “single rule book” – maximum harmonisation of regulations at the European level.

On 20 July 2011 the European Commission announced proposals for the CRD IV and the Capital Requirements Regulation (CRR) aimed at repealing the then applicable Directives (2006/48/ЕС and 2006/49/ЕC).

These proposals were a significant step towards maximum harmonization of legislation at the EU level to limit the possibility of deviations from what is stipulated in the new regulatory framework. The new EU regulatory framework based on the Basel III standards (unlike the current based on the Basel I and Basel II), does not allow supervisors to establish more conservative standards at the national level. Instead, it envisages that stricter rules can only be applied at the level of individual banks, through the application of Pillar 2 of Basel standards.

The new set of regulations (Directive 2013/36/EU – CRD IV and Regulation (EU) 575/2013 – CRR) entered into force on 17 July 2013, to be applied as of 1 January 2014, and fully implemented by 1 January 2019. EU member states are required to transpose the directive in their national legislations while the Regulation applies directly.

Directive 2013/36/EU contains provisions governing the authorisation of the banking business, the acquisition of qualified holdings in banks, the exercise of the freedom of establishment and of the freedom to provide services, the powers of supervisory authorities of home and host member states and the provisions governing the initial capital and the supervisory review process. In addition, the Directive imposes restrictions on discretionary distribution of profits for the purpose of creation of capital conservation buffer, and sets out requirements related to countercyclical capital buffer. The main objective of the Directive is to coordinate national provisions concerning access to the banking industry, the modalities of bank governance and supervisory framework.

Regulation (EU) 575/2013 sets out unique and directly applicable prudential requirements for banks pertaining to regulatory capital, capital requirements for credit, market and operational risks, as well as requirements on liquidity and disclosure of information by banks.

Special role in the implementation of regulations pertaining to Basel standards is played by the European Banking Authority (EBA), set up by the Regulation (EU) 1093/2010. The EBA contributes to the establishment of joint regulatory and supervisory standards in practice in the European Union by issuing opinions, developing guidelines and recommendations and drafting regulatory and implementing technical standards.